Hard Market Conditions Expected to Ease in 2025 as Claims Inflation Softens: Swiss Re

Hard market conditions in the global non-life insurance sector will continue this year, but will begin to ease in 2025, as general inflation and claims inflation conditions soften, according to Swiss Re in a report, which discusses the macroeconomic factors that are driving growth in the non-life insurance and life insurance sectors.

Non-life premiums grew by 3.9% in real terms in 2023, up from 0.8% in 2022 — an improvement primarily driven by rate hardening, said Swiss Re’s sigma report, titled “World insurance: strengthening global resilience with a new lease of life.”

The report noted that rate increases in personal lines have exceeded those in commercial lines, which are beginning to ease after years of hard market conditions.

The profitability of the non-life sector is continuing its upward trajectory, showing a 6% increase in 2023, Swiss Re said, noting that stronger underwriting results and investment returns will drive improved sector profitability.

Swiss Re estimated that non-life insurers’ return on equity will improve to about 10% in 2024 and 10.7% in 2025, with progress on both the underwriting and investment fronts.

“We see underwriting results turning positive, supported by high premium rates, rising exposures and easing claims growth as inflation moderates. Investment returns will continue to benefit from the higher interest rates, while the cost of capital will remain broadly stable,” the report said, noting that investment returns in both the non-life and life sectors are benefiting from higher interest rates.

In a commentary accompanying the report, Swiss Re said: “An insurance sector in healthy earnings mode will attract more capital. This, in turn, will drive industry growth and expand risk transfer capacity, enabling the industry to contribute more to narrowing existing protection gaps in many parts of the world.”

However, Swiss Re warned in the report that non-life insurers need to remain alert to potential new inflation shocks such as those caused by geopolitical conflicts that disrupt global supply chains and rekindle claims inflation. In addition, social inflation has been a key concern for liability insurers in the U.S. since 2015, and there are signs that social inflation also is affecting the Australian market.

Macroeconomic Trends

Insurers are benefiting from a resilient macroeconomic environment, said Swiss Re, which forecasts global economic growth of 2.7% in 2024 — a significant improvement over expectations a year ago.

“Steady economic growth, strong labour markets, rising real incomes as inflation moderates, and higher interest rates are driving and will continue to drive insurance demand. And higher interest rates are supporting industry profitability,” the report said. Swiss Re estimates that total premiums — for both non-life and life — will grow by 3.2% in 2024, “with higher interest rates boosting demand for life savings business, and still hard market conditions supporting non-life business, especially in personal lines.”

In a statement accompanying the report, Jerome Jean Haegeli, group chief economist, Swiss Re Institute, said: “The insurance industry has reached a new equilibrium. The global economy has surprised on the upside, which should drive more demand for insurance.”

The report noted that “Growth has proved resilient, disinflation — although bumpy — is running its course, and interest rates have moved higher. This bodes well for stronger investment returns for insurers generally and easing claims costs in non-life.”

Addressing the issue of inflation, Swiss Re said the worst of the post-pandemic global inflation crisis is over, but upside risks remain, “which could continue to put upward pressure on insurance claims.”

“Central banks, meanwhile, will likely continue to prioritize inflation containment over growth,” Swiss Re continued.

Further, geopolitical risks are significant and are on the rise, which adds “uncertainty to the outlook for economies and insurance markets.”